Posted January 1999
Purchasing calves (stockers) in spring and selling them in the fall as feeder cattle may be a way to convert pasture to profit for those with a surplus of grass but not a lot of facilities. But managing pasture, animals, costs, and markets plays a key role in determining the level of profit producers can expect. “Producers who have a solid understanding of their costs and rates of gain can use a simple management tool to determine what spring calf prices will make money for them in the fall,” says Don Schuster, economist with the Center for Integrated Agricultural Systems (CIAS).
Schuster worked with a UW-Madison team including Rick Klemme, CIAS director, Dan Schaefer and Mike Siemens of Animal Sciences, Dan Undersander of Agronomy, and stocker operator and veterinarian Larry Smith to develop a stocker budget. They modeled financial returns to farmers using beef stockers (those from beef cattle breeds) and Holstein stockers over a six-month grazing season, and used the model to calculate costs and returns on a per head and per acre basis for the stocker and pasture enterprises. They also developed a set of tables that show break-even points for both beef and Holstein stockers.
The enterprise budgets require several assumptions. Both stocker types graze 200 days on a total of 100 acres. They use management intensive rotational grazing (MIRG), which results in higher grass production, higher stocking rates, and increased profits per acre compared to continuous grazing.
The enterprise budget takes into consideration costs of labor, pasture, minerals, implants, marketing, veterinary, pumping water, interest, and miscellaneous needs. It assumes that the producer already has basic equipment for fence construction and maintenance and cutting and raking hay. Equipment costs include depreciation, fuel, and maintenance.
Costs associated with seeding the pasture are included, but fertilizer costs are not, since existing soil test levels and stocker manure are assumed to provide adequate nutrients for pasture growth. Pasture yields are 4 tons (3.4 tons dry matter, dm) per acre, which exceeds the stockers’ needs. The surplus forage is custom round baled, with the beef stocker providing less hay than the Holstein operation. The 100 acres used in the operation has an exterior fence with six interior paddocks. Water, piping, and tank costs are included, as are the cost of a loading chute and gates for handling the cattle.
The land rent is assumed to be $60 per acre. Schuster says, “This cost is almost 10 percent below the 1992 state average, but most likely poorer quality land would be used for grazing. Significantly higher rent will have a negative impact on profit potential, unless yields and stocking rates can be increased.”
The team’s assumptions resulted in a per head net return (profit) of $85.17 for the beef stockers and $71.08 for the Holstein stockers.
|Assumptions used for stocker scenarios|
|Scenario variable||Beef stockers||Holstein stockers|
|Purchase weight||500 lbs.||300 lbs.|
|Stocking rate||1.4 head/acre||1.5 head/acre|
|Death loss||1 percent||2 percent|
|Daily dry matter intake||2.8 % of body weight||3.2 % of body weight|
|Daily rate of gain||2.2 lbs.||2 lbs.|
|Selling weight||940 lbs.||700 lbs.|
Break-even purchase prices
Farmers who wish to wish to evaluate a stocker enterprise’s profitability need to know how much they can pay for calves in the spring and still make a profit in the fall. The team developed a table to help farmers calculate this figure, based on the scenario. They calculated the point where returns equal costs (break-even points) by varying daily rate of gain and price spread. “Reading down and across the tables, producers will find a predicted break-even purchase price for stockers using our budget. Profit is zero at the break-even price, so farmers need to calculate and add a targeted profit,” Schuster says.
For example, a producer who is buying beef stockers with expectations of selling them in the fall for $0.65 per pound with a daily rate of gain of 2.2 pounds per day can pay up to $0.93 per pound for calves and break even. A producer who is buying Holstein stockers that will gain 2 pounds per day and sell for $0.65 per pound in fall can pay up to $1.09 per pound in spring and break even.
Daily rate of gain has an important impact on the profitability of the operation. Assuming prices and costs described in the budget scenario, the break-even rate of gain for beef and Holstein stockers was just under 1.5 pounds per day.
The break-even purchase price tables show the importance of the daily rate of gain in another way. For a producer who receives a fall price of $0.60 per pound on beef stockers, increasing the daily rate of gain from 1.4 to 2.0 pounds per day means that he or she can spend $0.15 more per pound on calves in the spring and still break even.
The team found that each additional 0.1 pound of gain per day for both beef and Holstein stockers is worth about $13 (net) per head when they are sold, using the numbers in this example, and keeping in mind that prices per pound may decrease as weights increase. In addition, extra costs incurred in increasing the rate of gain would have to be deducted.
The difference between the price paid for the calves in spring and received for them in fall, called the “price spread,” is also a key variable. In this example, beef stockers are purchased for $0.80 per pound and sold for $0.68 per pound, a price spread of $0.12. The break-even selling price for beef stockers was $0.59 per pound, which is a $0.21 price spread. Every $0.01 change in price spread for beef stockers is worth about $10 per head on this operation.
The budget assumed a $0.22 price spread for the Holstein stockers. The break-even selling price for Holstein stockers is just under $0.58 per pound, which is a $0.32 price spread. For the Holstein stockers, every $0.01 per pound change in price spread resulted in a difference of $7 per head.
The break-even purchase price tables highlight how price spread affects financial performance. When a producer of Holstein stockers receives a fall price of $0.70 per pound, and pays only $0.93 per pound in the spring (a price spread of $0.23), the cattle only need to gain 1.4 pounds per day for the producer to break even. But when the producer pays $1.39 per pound in the spring (a price spread of $0.69), the cattle need to gain 2.4 pounds per head per day for the operation to reach the break-even point.
Stockers can be a good fit
This budget shows profits ranging from $80 to $100 per head with a management charge of $18 per acre included. Klemme warns, “If any of the costs turn out to be higher than in this scenario, rate of gain lower, or the sell-purchase price spread more than expected, these profits can rapidly disappear.” For example, a 10 percent decrease in the rate of daily gain from the budget example reduces profit by $29.85 per beef stocker and $27.14 per Holstein stocker. A 10 percent drop in the selling price compared to the budget price results in a decrease in profit of $63.91 per beef stocker and $47.60 per Holstein stocker.
The financial success of a stocker operation will depend on some factors which are largely outside of the producer’s control, like weather and price spread. Some producers use hedging instruments in the form of forward, futures, or options contracts to protect their prices. Others follow market reports closely or rely on many years of marketing knowledge to decide how and when to sell their cattle to receive the best prices. But by having some control over costs, rates of gain, and type of stockers, producers can estimate their profits based on spring calf prices and fall feeder prices.
|Beef stocker break-even purchase prices ($/lb.)|
|Gain||Selling prices ($/lb.)|
|Holstein stocker break-even purchase prices ($/lb.)|
|Gain||Selling prices ($/lb.)|
For updated research on stocker enterprise budgets, see UW Extension Publication A3718: Stocker enterprise budgets for grass-based systems
Published as Research Brief #36